Arcosa, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Arcosa supplies infrastructure-related products in North American construction, engineered structures, and transportation markets.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $584.8 million | $602.8 million | $1,134.0 million | $1,138.6 million |
| Operating profit | $51.0 million | $57.2 million | $126.1 million | $91.9 million |
| Net income | $40.9 million | $39.0 million | $96.6 million | $59.2 million |
| Diluted EPS | $0.84 | $0.79 | $1.98 | $1.21 |
| Operating margin | 8.7% | 9.5% | 11.1% | 8.1% |
| Net margin | 7.0% | 6.5% | 8.5% | 5.2% |
Q2 revenue fell 3.0%, while operating profit declined 10.8%; net income rose 4.9%, helped by a lower effective tax rate and other income. For the first half, revenue was nearly flat, but operating profit increased 37.2% and net income rose 63.2%. Six-month operating profit included $22.6 million of gains from sales of depleted land and a $6.4 million additional gain related to the 2022 storage-tanks divestiture. The $5.0 million reduction in a prior acquisition holdback also benefited Construction Products earnings.
- Construction Products: Q2 revenue grew 7.7% to $264.8 million and operating profit rose 22.4% to $34.4 million, reflecting pricing, recycled aggregates and shoring growth, plus the holdback benefit. First-half operating profit also benefited from land-sale gains.
- Engineered Structures: Q2 revenue fell 22.9% to $207.0 million and operating profit fell to $21.7 million, principally because the storage-tanks business was sold in October 2022. Excluding the divestiture, management cited lower utility-structure margins and lower wind-tower volumes, partly offset by wind-tower tax credits.
- Transportation Products: Q2 revenue increased 28.0% to $113.0 million and operating profit rose to $11.6 million, driven by higher volumes and improved margins in barges and steel components.
Cash flow, liquidity and debt
- First-half operating cash flow was $154.9 million, versus $111.2 million in 2022. Investing activities used $86.1 million, including $96.9 million in capital expenditures; financing activities used $31.3 million. Cash increased $37.5 million to $197.9 million.
- Capital expenditures were $96.9 million in the first half, compared with $52.9 million a year earlier. Management expects 2023 capital expenditures of approximately $185–$210 million, including new wind-tower and utility-structures facilities and Construction Products growth projects.
- At June 30, total debt was $546.6 million, including $400.0 million of 4.375% senior notes due 2029 and a $135.0 million term loan. There were no revolving-credit borrowings; $474.9 million remained available under the $500 million facility after letters of credit. Cash plus stated revolver availability was approximately $672.8 million.
- The term loan and revolving facility mature January 2025. Arcosa reported compliance with financial covenants. It amended the credit agreement to replace LIBOR with SOFR; its interest-rate swap transitioned to SOFR on July 1, 2023 and expires in October 2023.
- Working capital investment, including increases in receivables and inventories, used cash. The company stated that cash, available liquidity, and operating cash flow should fund operating needs and necessary capital expenditures for the foreseeable future.
Backlog, outlook and notable items
- Utility, wind, and related-structures backlog was $1.507 billion at June 30, up from $671.3 million at year-end 2022; 27% is expected to be delivered in the remainder of 2023, 23% in 2024, and the balance through 2028. Inland-barge backlog was $287.1 million, with 45% expected in the remainder of 2023 and the rest in 2024.
- Management described Construction Products demand as healthy overall, supported by infrastructure spending and private non-residential activity, while higher rates and affordability pressures weigh on single-family housing. It cautioned that economic indicators suggest possible slowing over the next 12 months.
- Management said utility-structure demand and inquiries remained healthy. More than $1.1 billion of wind-tower orders for delivery through 2028 had been received since passage of the Inflation Reduction Act (IRA). Arcosa plans a New Mexico plant, with production expected to begin in mid-2024, and anticipates a multi-year wind-volume rebound beginning in 2024.
- Barge backlog was at its highest level since Q1 2020; management cited an aging fleet, high utilization, and replacement demand. Steel-components demand was recovering from cyclical lows.
- Arcosa recognized $7.8 million of refundable advanced-manufacturing production tax credits in Q2 and $12.1 million in the first half, recorded as reductions to cost of revenues. Management noted that related IRA provisions remain subject to additional guidance.
- The company paid a $0.05-per-share quarterly dividend in July. No open-market repurchases were made in the first half; the full $50 million repurchase authorization remained available. Shares surrendered to cover employee tax withholding are not program repurchases.
Risks and contingencies: Results are affected by seasonality and cyclical markets, weather, demand, steel and other input costs, inflation, interest rates, customer order timing, and the ability to realize IRA tax-credit benefits. The filing reported $21.3 million of accrued liabilities for claims and contingencies, offset by a $20.5 million indemnification asset; management estimated reasonably possible losses for the identified matters at $1.5–$1.6 million. Environmental liabilities and future proceedings remain inherently uncertain. The filing reported no material change in risk factors from the 2022 Form 10-K.
Guidance: The filing provides capital-expenditure expectations and market commentary, but no consolidated revenue, earnings, or EPS guidance.
Most important facts for investors to verify
- How much of first-half operating-profit growth reflects recurring segment performance versus the $22.6 million land-sale gains, holdback benefit, and other unusual items.
- Whether the large utility/wind backlog converts to deliveries and margins on schedule, and whether the New Mexico facility opens as expected.
- How durable the IRA wind-tower credits are, including the impact of pending guidance and the credits’ contribution to costs and taxes.
- Whether barge and construction demand, pricing, and margins withstand possible economic slowing and seasonal effects.
- Execution of the $185–$210 million capital-spending plan, cash conversion, and debt and covenant position as the 2025 credit-facility maturity approaches.